From the DWP to the economy – the Coalition’s growing credibility chasm

All the wrong things for all the wrong reasons: The evidence shows no good reason for George Osborne's economic austerity policies - other than, possibly, an intention to rob this nation of everything possible before 2015.

All the wrong choices for all the wrong reasons: The evidence fails to support George Osborne’s economic austerity policies – the only likely explanation seems to be an intention to rob this nation of everything possible before 2015.

The more we learn of the Tory-led Coalition’s policies, the wider the gap grows between what it is doing and what it should be doing.

Look at the sham psychometric tests, exposed by fellow blogger Steve Walker in a series of articles on his Skwawkbox site. It is now firmly established that the DWP – aided by the Cabinet office ‘nudge unit’ – set out to pressgang put-upon benefit claimants into taking part in a crude piece of neuro-linguistic programming – no matter what answers you provided, the test always pushed out a ridiculously upbeat appraisal of your character and then tried to get you to act according to this verdict in your jobsearching activities. The theory is that this will make a jobseeker more confident and finding a job easier. The problem is that it’s quite utterly ludicrous.

If you haven’t already, you can read the Skwawkbox exposure of this particular caper on that site – there are plenty of links to it from this one. The reason it is mentioned here is that it provides a useful set of questions with which to analyse any government activity: First, is the theory behind this activity sound? Second, if that theory is being used to support a particular course of action, is that action justifiable?

So let’s turn once again to George Osborne’s reasons for pursuing economic austerity, as described in the letter Vox Political received from the UK Treasury last month.

Firstly, the letter warns against the perils of losing market confidence. By this, we can see that it means we should fear any downward revision of our credit rating by the credit agencies, as “a one percentage point increase in government bond yields would add around £8.1 billion to annual debt interest payments by 2017-18”.

What’s being said is that a drop in our credit rating would mean the people and organisations that have invested in UK government debt (by buying our bonds) might move their funds to others, meaning the government could be faced with an interest rate rise, leading to increased difficulty in borrowing.

But we know that this isn’t true. The UK’s credit rating was downgraded only a few months ago. Did interest rates rise? Was our ability to borrow hindered at all? No. There’s a reason for that.

As Professor Malcolm Sawyer notes in Fiscal Austerity: The ‘cure’ which makes the patient worse (Centre for Labour and Social Studies, May 2012), “It is well-known that a government can always service debt provided that it is denominated in its own currency. At the limit the UK government can ‘print the money’ in order to service the debt: this would not take form of literally ‘printing money’ but rather the Central Bank being a willing purchaser of government debt in exchange for money.” This is what is happening at the moment. Our debt is in UK pounds, and we can always service it. Our creditors know that, so they remain happy to continue financing it.

This means that the Treasury’s next point, that “any loss of investor confidence in the UK’s fiscal position would not only affect the UK, but also the global economy” is also meaningless. There won’t be a loss of investor confidence, so there won’t be an effect on the global economy.

We move on – to the Chancellor’s claim that fiscal austerity is required to prevent the slowing of economic growth that happens when the national debt hits 90 per cent of gross domestic product (or thereabouts).

You’ll recall that my letter to the Chancellor was prompted by the revelation that the academic paper on which he relied most often, by Reinhart and Rogoff, had been proved to be mistaken. The Treasury’s response pulled out a series of references to other academic works suggesting a fiscal cliff similar to the Reinhart-Rogoff model, off which we would drop if the national debt passed an arbitrary level around 85-90 per cent of GDP. These were published by the International Monetary Fund, which we know isn’t quite as keen on austerity as it used to be; the Organisation for Economic Co-operation and Development, which this blog marked out as “schizoid” only a few days ago; and others.

Obviously I haven’t had time to look up eight academic works to support any opposing theory I may wish to create – and I think I would be foolish to try. I don’t have any grounding in economics beyond what I’ve been able to pick up by following the national and international debates.

But, then, according to Dean Baker of the Center (yes, it’s American) for Economic and Policy Research: “As a general rule economists are not very good at economics.”

He writes: “Most economists are unable to conceptualize anything that someone with more standing in the profession did not already write about. This is the only reason that the Reinhart-Rogoff 90 per cent debt-to-GDP threshold was ever taken seriously to begin with.”

That prodded my curiosity to check some of the papers listed by the Treasury in support of its stance, and the three that I checked (The Real Effects of Debt, Public Debt and Growth, and How Costly Are Debt Crises?) all listed the Reinhart-Rogoff paper in their supporting references. So Mr Baker is right.

“Debt is an arbitrary number,” he continues. “The value of long-term debt fluctuates with the interest rate… The value of our debt will plummet if interest rates rise… This means that we could buy back long-term debt issued today at interest rates of less than 2.0 percent for discounts of 30-40 percent. This would sharply reduce our debt-to-GDP ratio at zero cost.

“Bonds carry a face value, meaning the amount that will be paid off when they reach maturity. This is what gets entered in our debt figure. However bonds also carry a market price, which fluctuates inversely with interest rates. The longer the term of the bond, the more its price will vary with interest rates.

“If interest rates rise, as just about everyone expects over the next three-to-five years, then the market price of the bonds we have issued in the current low interest rate environment will fall sharply. Since we count our debt at the face value of the bonds, not their market price, we could take advantage of the drop in bond prices to buy up… bonds at sharp discounts to their face value.

“The question is why would we do this, we would still pay the same interest? The answer is that the policy would make no sense for exactly this reason.

“However, if we accept the Reinhart-Rogoff 90 per cent curse, then reducing our debt in this way could make a great deal of sense. Suppose we can buy back debt with a face value of 60 per cent of GDP at two-thirds its face value, or 40 per cent of GDP. In our debt accounting we would have reduced our debt-to-GDP ratio by 20 percentage points. If this gets us below the 90 per cent threshold then suddenly we can have normal growth again.

“Yes, this is really stupid, but if you believed the Reinhart-Rogoff 90 per cent debt cliff, then you believe that we can sharply raise growth rates by buying back long-term bonds at a discount. It’s logic folks, it’s not a debatable point — think it through until you understand it.”

I found Mr Baker’s piece after asking Jonathan Portes of the National Institute for Economic and Social Research (NIESR) for his opinion on the Treasury letter. He described it as “Predictable and largely irrelevant”.

So despite my lack of economic education, we have a working theory that suggests the Treasury has built its economic castle on the sand; that its justification for austerity is unsound. What about the austerity measures themselves? Are they justifiable on any level at all?

Evidence suggests not.

Let’s go back to our other friend in this matter, Prof Malcolm Sawyer. “Fiscal austerity and cuts in public expenditure do not work – there is a limited, if any, effect on reducing the budget deficit, and any return to prosperity is severely undermined.” We can see that this is true, using the government’s own figures. It managed to cut the deficit from £150 billion to £120 billion in 2011-12, mostly by axing large projects that invested in the UK economy. How much did it cut from the deficit in 2012-13? Less than £1 billion. The benefit cuts that created much of the fuel for this blog have not helped to cut the deficit at all.

“The reduction of the budget deficit can only come from a revival of private demand which is harmed by an austerity programme,” Prof Sawyer continues. Again, we can see that this is true. Austerity measures such as benefit cuts and the axing of infrastructure investment projects means there is less money available to the people who are most likely to spend it – the working- and middle-classes, and those who are unemployed. People with less money have to spend just about everything they receive in order to cover their costs. That money passes into circulation and the economy grows, through the fiscal multiplier effect. An attempt to explain this effect appeared on this blog within the last few days. The point is that demand increases when the people who earn the least have more to spend.

Therefore we see that Prof Sawyer’s next statement, “Deficit reduction requires investment programmes and reduction of inequality to stimulate demand”, is already proved.

So the answer is to reduce the unemployment rate by creating more jobs and closing the jobs deficit, as highlighted in this blog only a few days ago; to raise incomes by significantly increasing the minimum wage and adopting the proposed ‘living wage’, as promoted in this blog frequently; and investment in infrastructure projects.

What has Osborne done, along with his economically-illiterate chums?

He has created high unemployment.

He has depressed wages.

He has cut infrastructure projects.

He has, therefore, sucked all the demand out of the economy. What effect has this had?

Economic growth has, in the single word of Shadow Chancellor Ed Balls, “flatlined”, borrowing has remained high and the national debt is continuing to rise.

In other words, this part-time Chancellor’s strategy – a plan on which we have all been asked to judge the entire Coalition government, let’s not forget – has failed. Hopelessly.

I return you to Prof Sawyer, one last time [bolding mine]: “The austerity programme is economically irrational, socially irresponsible, and lacks credibility that it can reduce the budget deficit and secure any return to prosperity. The time has come to rebuild through investment and through a major assault on inequality.”

12 thoughts on “From the DWP to the economy – the Coalition’s growing credibility chasm

  1. Big Bill

    Austerity bad! Who says? Many peeps!

    But it’s very useful if you want to convince people they can no longer afford an NHS, or courts, or schools, or anything really so you can sell them off to your mates and charge the people who paid for them in the first place to use them. As we see, it works very well too as most people are quite happy to believe any nonsense the media feeds them.

  2. Geraldine Mitchell

    “the intention to rob this nation of everything possible before 2015” ….is the real agenda of this elitist government. Look at the asset stripping which has being going on ; nearly 2000 State schools and the land they sit in given away to Tory party members ( such as Stanley Fink ‘god of the hedge fund industry’ via Ark Schools who promise that any “underspends” from his schools will go to the Cayman Islands via ‘Stanley Finks Ark Stockbrokers’); All London’s fire engines sold to an Old Etonian for £2 each; They are now selling the Post Office which has become profitable because of Internet shopping, but which has been subsidised for years by taxpayers when it ran at a loss; and thats just 3 examples not mentioning the NHS sell off of public assets which taxpayers have built and/or maintained being given or sold to individuals without public consultation or discussion. This is nothing less than asset stripping publicly funded buildings and businesses.
    And what about the ring fenced departments who have not had to make massive cuts in this absurd austerity program. The Department for International Developments’ budget has risen by a staggering 30% since the Tories were not mandated into power. Are the Tories really concerned so much with the poor of other countries ? It appears that the DfID is the money laundering Department for the looting of the benighted British public. The Adam Smith institute was used to be a right wing think tank, however it has now become the Adam Smith International which gets most of its income (£37 million from DfID last year of taxpayers money of which the MD paid himself a salary and dividends totalling £1.3 million – their remit is to push the free market agenda in impoverished countries. I have no time to describe their utterly cynical and failed interference in Afghanistan, but please look it up) In 2011-12 DfID awarded 135 contracts to 35 contractors. 5 contractors including the Adam Smith International won most of these contracts which altogether cost taxpayers £489 million. That DfIDs budget was increased to £11.3 billion in 2013-14 is mind boggling in a country where we are seeing child poverty increasing and people are being made destitute because this Government are trying to ‘save’ on spending. Several of the best paid consultants are former DfID officials who have gained substantial increases in their personal wealth since leaving the department, even though they are essentially doing the same work. Poor taxpayers are the fall guys again in this racket of Poverty Barons to become millionaire consultants on corporate welfare as they award themselves multi million pound salaries from aid spending. This department have been promised an increase in budget of 35% in the next 3 years which illustrates the liminal space which houses the revolving door between the private/public sectors which are set up to steal from the public. If DfID can be given an extra £3 billion a year where is the austerity? The austerity is enforced only to run down services enough so that they can then be privatised so the rich can lap them up and become that much richer, The cost to the people of this country is catastrophic and lethal , even the infant mortality rate is on the increase after forty odd years. No wonder everytime we are shown Osborne and Cameron they are sniggering, they’re very popular I have no doubt with all the ‘friends they are giving away Britain to

  3. skwalker1964

    Reblogged this on The SKWAWKBOX Blog and commented:
    Brilliantly reasoned piece by Vox Political on the idiocy of George Osborne’s economic idiocy. We need more of this kind of bold, radical thinking to challenge all the too-easily accepted tropes about debt, lack of cash, the need to ‘tighten our belts’ that are trotted out as fact on every news and politics show when austerity is mentioned.

    It’s quite long but very worth the read. If you still have time and appetite afterward, I’d recommend reading it in conjunction with this:

  4. murray

    If Eton teaches how to rape and pillage your own country,then I for one am quite glad my family did not have the finances to send me there.

  5. Nick

    Point of order: the not-very-appropriate psychometric tests were derived from academic psychology, not “neuro-linguistic programming” (NLP), which is a sort of pseudo-science pastiche of psychology for people who can’t be arsed to study anything very difficult, but enjoy manipulating their friends. And the tests weren’t (inherently) quite as meaningless as portrayed; they were, however, entirely inappropriate for the use that was being made of them. That arguably makes the situation worse than was discussed at the time, in that proper psychologists work within ethical boundaries, and spamming benefit claimants with surveys would not generally pass muster in this regard.

    However, NLP does turn up in some of the happy-clappy training courses that A4e force benefit claimants to attend. Somehow 2.5 million people are going to use their new-found charm skills to get their way into the 0.5 million vacant jobs. That should be fun to watch.

    1. Mike Sivier

      That’s interesting. My understanding was that NLP does come into it; when you finish the survey and get your results (which are the same for everybody), it is those results that are examples of NLP – they try to get you to do something you would not otherwise have done, using language-based methods.

      1. Nick

        No, those are the official psychology- (“positive psychology”) based exercises. Also, the results are not strictly the same for everybody, although if you make enough of a dog’s breakfast of the implementation it might well seem that way.

        The underlying science is certainly not going to send us to Mars or build fusion reactors, but it’s at least “reasonably valid”, as science (and psychology in particular) goes. That doesn’t mean that you can go round telling people how to change their lives via simple messages on a screen, and it most certainly doesn’t justify some muppets in the Nudge Unit deciding to apply that science to a large group of vulnerable people whose e-mail addresses they should never have been allowed to use from the DWP database, but the science is mostly innocent here, at least directly – the US institute that looks after this chunk of the science was appalled at what the muppets were up to. (There are issues around how positive psychology is attempting to grab some of NLP’s share of the general “how to be happy by manipulating yourself, if not others” market, but they’re a step removed from this particular dicsussion.)

  6. richardbroomhall

    Reblogged this on this 'n that and commented:
    Credibility? The liberal lost that when they slipped into bed with the Tories, the Tories never had any to begin with. Not with the new breed of the likes of Cameron,Osborne plus the rest of the public school chums.

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